5 To-Dos for Retirees as Volatility Returns

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. With the return of equity market volatility, many retirees and those about to enter retirement are wondering what to do. I'm here with Christine Benz. She's our director of personal finance, with five to-dos for those folks.

Christine, thanks for joining me.

Christine Benz: Jeremy, great to be here.

Glaser: Let's start with the first to-do, which is really to put these losses into perspective. Just take a moment to take a step back.

Benz: It can be really scary for people who are either getting close to retirement or actively drawing upon their portfolios when the market falls off as it has recently. I do think that taking the very long view on your portfolio is crucial. Remember that we've had a great runup since 2009. If you're happy with where your portfolio stood at the end of 2017, well, you're kind of right back there, with these recent losses factored in. Remember that. Dialing it back even further, over the past 30 years, we've had extraordinarily strong returns from both stocks and bonds, remember that as well. That you've had this great tailwind and your portfolio is still probably in pretty good shape. Thanks to some of those forces.

Glaser: The second to-do though is really to dive into your portfolio, check your asset allocation, and make sure that is where you want it to be.

Benz: Right. I always say if someone's, say, under 50, don't get too caught up in terms of checking up on your portfolio's asset allocation. But it's truly important when you're retired or getting close to retirement and planning to actively draw upon your portfolio, to periodically assess your portfolio's asset allocation. If you're spending from your portfolio, as you know I'm a big believer in the bucket strategy for retirement, asset allocation, so if you're spending from your portfolio, use your portfolio withdrawals to guide how much to hold in those safe asset classes.

In my model bucket portfolios, I've typically carved out two years' worth of portfolio spending in cash instruments. Another three to eight or three to 10 years' worth of portfolio spending in high-quality bonds. If you haven't revisited your portfolio's asset allocation recently and you're getting close to retirement or already retired, do it now. If you've been very hands off and say you had a 60% equity, 40% bond portfolio in 2009, well, you're 85%, 15% bonds right now. You probably are more aggressive than you want to be.

Glaser: That leads into the third to-do, which is to check up on those liquid reserves and your high-quality bonds sleeve and make sure that they really are liquid and high quality.

Benz: Right. Really poke at that high-quality bond piece or the bond piece in your portfolio. We've seen much better returns, much better yields from some of the lower quality stuff recently. High-yield bonds, emerging-markets bonds, make sure that that isn't the complexion of your fixed-income portfolio. If you're looking for something to be true ballast for your equity holdings, you want it to be high quality. You probably don't want to be taking a lot of interest-rate risk at this juncture. It doesn't mean you want to be entirely short term, but you probably want to be primarily short- and intermediate-term with your bond portfolio and high-quality is key.

Glaser: One of the things retirees and everyone may have noticed is that both bonds and stocks have sold off recently. Is that a case against using bonds for diversification, or is that more of a short-term blip?

Benz: Yeah, it's been a little peculiar, I would say. It's probably troubling to people who have said "Well, I've followed the advice to hold high-quality bonds, and here they go. They've been going down right along with stocks." On that front, I would say a couple of things. One is that even though high-quality bonds have indeed gone down, the magnitude of their losses has been much less than stocks. That's a persistent pattern that we see over market cycles. I would bear that in mind.

Secondly, I would bear in mind that over the very long term we typically do see high-quality bonds hold up relatively well in equity market shocks. I don't see any big reason to suspect that that pattern will be different. Focus on the long view versus the losses that we've experienced in high-quality bonds on the very short-term basis.

Glaser: Your fourth to-do is to take a look at your spending rate and make sure that that is also where you want it to be.

Benz: Right. As we've all seen, our portfolios become enlarged, it's been easy to get a little bit complacent about our spending. We've all felt that wealth effect, as our portfolios have enlarged. But one of the key things retirees can do to make a save when their portfolios are declining is to rein in their spending a little bit. In fact, a lot of the great research about withdrawal rates has come back to that conclusion. If you can be a little bit market sensitive, that can go a long way toward improving your portfolio sustainability over your retirement time horizon. That's not to say that you should radically cut your spending--stop going to the movies or going out to dinner. But it does mean that you should be willing to rein it in a little bit if what we've started to experience in terms of market volatility proves to be something more persistent.

Glaser: And finally, it's worth it to take a look at your portfolio and sweat the small stuff.

Benz: Absolutely. Also in the realm of stuff that you can control as a retiree, on the short list would be things like looking at your cash holdings and what they're yielding. If you haven't revisited that lately, one thing we've seen is that cash yields have popped up pretty nicely. If you've been not paying attention, you maybe are stuck in some low yielding stuff, you could do better. Watch your investment related expenses. That's one of the best ways that I know of to improve take home returns. That's fund expense ratios, any advisory fees that you're paying, any other investment related costs. See if you can't trim them.

Finally tax costs are another big area that retirees can exert some level of control over. Most retirees are pulling their assets from multiple pools of money, whether taxable assets, Roth, or tax-deferred assets. If you're not super savvy on tax matters, work with a tax advisor to strategize about where best to pull your money from on a year-to-year basis in order to improve your take-home aftertax returns.